Thursday, September 16, 2010

[U.S. Capitulation to the Chinese] Japanese Currency Intervention

For the first time since 2004...

Economist's Free Exchange:

AMONG today's big news items is the word that Japan is now actively selling yen in order to improve its exchange rate against other major currencies. The yen has risen sharply in recent months, dealing a blow to Japanese exporters and slowing Japanese recovery.
The columnist looks at the development in a positive light.
Doom and gloom, but I feel more positive about this development. Consider Buttonwood's take:
As David Bloom of HSBC points out in a note responding to the move, the costs of intervention to the Japanese are not great. Selling yen and buying dollars results in more yen being created, which might be inflationary, but a bit of Japanese inflation wouild be a good thing.
My thought concerns the general tendency of countries to want their currencies to depreciate. Everyone would like to boost their growth by letting their currencies slide and increasing exports. Of course, not all can succeed. Someone must increase net imports and let their currency appreciate. The obvious candidate is the Chinese, but they are unwilling to let it happen (at least at a pace desired by the rest of the world).
The result is like a game of deflationary pass the parcel in which the countries with appreciating currencies eventually feel the pressure, and try to reverse the trend.
But, I wonder if this development is in fact simply the realization that China will not fairly value its currency -- irrespective of what this may or may not do with respect to the U.S. trade deficit -- and that rather than waiting for a time that will not come, Japan has decided the country could wait no longer.

Consider the South Korean Won. South Korean exports compete directly with many Japanese exports, and South Korean exporters have historically looked at a 10 KRW : 1 JPY ratio as the level where South Korean exports would still remain competitive with Japanese exports. However, this changed in 2008 as the South Korean Won collapsed. (Its performance was the second worst that year after, well, Iceland's currency.) Since that time, rather than the South Korean Won tracking the performance of the Japanese Yen -- which it historically has, the currency now seems to be tracking the performance of, well, the Chinese Yuan. Until the just announced Yen Intervention, the currencies have been trading at about 14 KRW : 1 JPY. (The link to a chart is here.) The story seems to be the same with respect to the New Taiwanese Dollar (TWD). (The link to a chart is here.)

So, doesn't it seem to be the case that the Japanese have decided that the expense of waiting for the Chinese to revalue is just too great? In this sense, it's hard to be optimistic when it seems to be a capitulation on the part of the U.S. to Chinese mercantile practices, which in the process seems to have dragged the rest of East Asia along with Beijing. What will it take before the U.S. "takes action"? (By the way, in this sense, I miss President George W. Bush. His ability to "take decisive action" -- whatever the costs or logic may be -- seems to be ostensibly missing right now. (I think with respect to defense issues I'm a huge supporter of current U.S. policy of re-engaging the East Asia region, but I think this would be there regardless of who is in power. e.g. Consider the Guam naval buildup since 2006.)

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